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  • FIRST POST
    • Rymo
    • By Rymo 16th Jul 17, 7:44 PM
    • 40Posts
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    Rymo
    Monthly Income from 120K - Monthly Income Funds
    • #1
    • 16th Jul 17, 7:44 PM
    Monthly Income from 120K - Monthly Income Funds 16th Jul 17 at 7:44 PM
    Hi,

    I am working part time due to being a carer. I earn appx £200 - £250 per week from self employment, part time, which bars me from receiving carers allowance payments.

    I have a portfolio of monthly income funds (X 8) which I use to provide me a base income.

    I have the following funds

    Artemis Monthly Distribution
    AXA Framlington Monthly Income
    HSBC Monthly Income
    Invesco Perpetual Monthly Income
    Jupiter Monthly Income
    Kames Diversified monthly income
    Premier Multi Asset Monthly Income
    Threadneedle Monthly Extra Income

    The funds cost 120K and are now worth 128K and I have been receiving an income for 15 months which I am happy with.

    The amounts in each fund are about equal.

    88K are held within ISA wrappers and I will move the rest in ASAP.

    I am 52 and have 141K in a DC pension which I don't intend to touch till 60. I intend to pay in £2880 each year to top this up so £3600 with tax relief.

    I also intend to top up the monthly income funds when I can.

    I appreciate markets go up and down and most important for me is that the income continues to be paid. If there was / is long term capital growth it would be a bonus.

    Can anybody see any massive problems with my strategy?

    Rymo.
Page 1
    • bigadaj
    • By bigadaj 16th Jul 17, 10:13 PM
    • 9,623 Posts
    • 6,125 Thanks
    bigadaj
    • #2
    • 16th Jul 17, 10:13 PM
    • #2
    • 16th Jul 17, 10:13 PM
    In general seems ok.

    We're obviously well overdue a market correction, but so long as you don't panic and sell out on a 30-40% loss and wait for recovery then should be ok.

    My main concern would be that most of those look uk focused, and many will be targeting a small number of large companies that pay high dividends, so you probably lack diversification and may suffer if a small part if the economy does badly, like the banks in 2008.

    I'd want soem funds that are global equity income, and there are now plenty of funds that focus on Asia, even some in South America, so would look at swapping into some of these for at least part of the portfolio.
    • Audaxer
    • By Audaxer 16th Jul 17, 10:30 PM
    • 318 Posts
    • 104 Thanks
    Audaxer
    • #3
    • 16th Jul 17, 10:30 PM
    • #3
    • 16th Jul 17, 10:30 PM
    I've also been looking at some of these multi asset income funds and just invested in the Artemis Monthly Distribution fund, and that one is well diversified globally although some of the others may have more UK bias.

    My only concern for the strategy would be if there is a market correction or crash, I'm not sure the funds would be able to continue to pay the same level of income that they currently pay.
    • sorcerer
    • By sorcerer 17th Jul 17, 11:21 AM
    • 789 Posts
    • 365 Thanks
    sorcerer
    • #4
    • 17th Jul 17, 11:21 AM
    • #4
    • 17th Jul 17, 11:21 AM
    Perhaps consider some investment trusts as well, many of which have paid a growing dividend for years. Such as City of London, Murray International and Scottish American.


    Also you don't always have to buy just funds that pay monthly, you could consider quarterly payers, that pay at different quarters.


    But in general I would agree with others too much in the UK big companies, be good to diversify your portfolio.
    • Malthusian
    • By Malthusian 17th Jul 17, 12:31 PM
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    Malthusian
    • #5
    • 17th Jul 17, 12:31 PM
    • #5
    • 17th Jul 17, 12:31 PM
    Even if you are unconcerned about the capital, the main risk to you is that we have a prolonged recession and UK companies either cut their dividends on a large scale (or even go bust) or fail to grow their dividends in line with inflation. Having so many funds is probably giving you a false impression of how diversified you are. Most of them are probably invested in largely the same kind of companies and when the market falls they will all fall together.

    Some companies pay out their surplus income, others reinvest it within the company, others do a bit of both. The choice to take the "natural" dividend income is therefore rather arbitrary and simply leaves the decision of how much income to take entirely in the hands of the management of the underlying companies.

    The alternative is to decide how much you actually need and then set up a monthly fixed withdrawal. Obviously if your chosen income is higher than the dividends you will be eating into the capital, but on the other hand if it is lower than the dividends, they can be reinvested to build up the capital. The advantage of this is that you are no longer restricted to funds which pay income out on a monthly basis and you are free to spread your investments far more widely.

    There is only a long-term problem if you choose a higher level of income than can be sustained, and to avoid this problem by letting the company and fund managers choose how much income you get is putting the cart before the horse. Classically speaking you should decide how much income you need and based on that decide suitable investments, not let the investments pick how much income you get. Unless you don't trust yourself with that decision.
    • Audaxer
    • By Audaxer 22nd Jul 17, 10:06 AM
    • 318 Posts
    • 104 Thanks
    Audaxer
    • #6
    • 22nd Jul 17, 10:06 AM
    • #6
    • 22nd Jul 17, 10:06 AM
    Even if you are unconcerned about the capital, the main risk to you is that we have a prolonged recession and UK companies either cut their dividends on a large scale (or even go bust) or fail to grow their dividends in line with inflation. Having so many funds is probably giving you a false impression of how diversified you are. Most of them are probably invested in largely the same kind of companies and when the market falls they will all fall together.

    Some companies pay out their surplus income, others reinvest it within the company, others do a bit of both. The choice to take the "natural" dividend income is therefore rather arbitrary and simply leaves the decision of how much income to take entirely in the hands of the management of the underlying companies.

    The alternative is to decide how much you actually need and then set up a monthly fixed withdrawal. Obviously if your chosen income is higher than the dividends you will be eating into the capital, but on the other hand if it is lower than the dividends, they can be reinvested to build up the capital. The advantage of this is that you are no longer restricted to funds which pay income out on a monthly basis and you are free to spread your investments far more widely.

    There is only a long-term problem if you choose a higher level of income than can be sustained, and to avoid this problem by letting the company and fund managers choose how much income you get is putting the cart before the horse. Classically speaking you should decide how much income you need and based on that decide suitable investments, not let the investments pick how much income you get. Unless you don't trust yourself with that decision.
    Originally posted by Malthusian
    Malthusian, I know what you mean, but are you saying there is no place for portfolios that just generate income? I think a lot of retirees and others that need income are happier to rely on ITs and funds that pay natural income than having to make capital withdrawls from a fluctuating growth portfolio.
    • atush
    • By atush 22nd Jul 17, 11:26 AM
    • 16,163 Posts
    • 9,855 Thanks
    atush
    • #7
    • 22nd Jul 17, 11:26 AM
    • #7
    • 22nd Jul 17, 11:26 AM
    Perhaps consider some investment trusts as well, many of which have paid a growing dividend for years. Such as City of London, Murray International and Scottish American.


    Also you don't always have to buy just funds that pay monthly, you could consider quarterly payers, that pay at different quarters.


    But in general I would agree with others too much in the UK big companies, be good to diversify your portfolio.
    Originally posted by sorcerer

    This.

    You are neglecting income investment trusts, some of whom have been paying increasing dividends for decades (in crash times and good times).
    • Malthusian
    • By Malthusian 22nd Jul 17, 11:27 AM
    • 2,619 Posts
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    Malthusian
    • #8
    • 22nd Jul 17, 11:27 AM
    • #8
    • 22nd Jul 17, 11:27 AM
    Malthusian, I know what you mean, but are you saying there is no place for portfolios that just generate income?
    Originally posted by Audaxer
    There is a place - for people who don't trust themselves to choose a level of income that won't deplete the portfolio.

    I think a lot of retirees and others that need income are happier to rely on ITs and funds that pay natural income than having to make capital withdrawls from a fluctuating growth portfolio.
    Bit old-fashioned now that it is easy to set up a fixed withdrawal from your portfolio with a modern fund platform. Expensive as well as you can access the same investments via index tracker funds.
    • ColdIron
    • By ColdIron 22nd Jul 17, 11:31 AM
    • 3,299 Posts
    • 3,803 Thanks
    ColdIron
    • #9
    • 22nd Jul 17, 11:31 AM
    • #9
    • 22nd Jul 17, 11:31 AM
    Malthusian, I know what you mean, but are you saying there is no place for portfolios that just generate income? I think a lot of retirees and others that need income are happier to rely on ITs and funds that pay natural income than having to make capital withdrawls from a fluctuating growth portfolio.
    Originally posted by Audaxer
    Depends on your circumstances, resources and objectives but there are many ways to skin a cat

    I use the 3 bucket or waterfall strategy split across several portfolios (SIPP, ISAs and unwrapped) in 3 layers. 1) Several years of cash 2) Income 3) Growth. I spend from 1 which is replenished monthly/quarterly etc by natural income from 2 which in turn is periodically supplemented by 3 when valuations or requirements suit me (every year or two or whatever). Resilient, low maintenance and copes well with my fluctuating incomings and outgoings

    You could jam it all in one mixed portfolio but keeping them separate helps me focus on the job of each portfolio and take advantage of different platform charging structures for ITs, funds and EFTs

    Works for me, but horses for courses and all that

    Can anybody see any massive problems with my strategy?
    Originally posted by Rymo
    The addition of a cash buffer, if possible, would widen your choice of investment to quarterly or biannually paying ones. It seems a tad knife edge to me. If you have a buffer, do you need to restrict yourself to the small selection that pay monthly?
    • Sue58
    • By Sue58 22nd Jul 17, 11:33 AM
    • 68 Posts
    • 11 Thanks
    Sue58
    This.

    You are neglecting income investment trusts, some of whom have been paying increasing dividends for decades (in crash times and good times).
    Originally posted by atush
    Do you think global investment trusts would be more useful such as Bankers, Caledonia, Brunner etc instead of just having UK IT's?
    Last edited by Sue58; 22-07-2017 at 4:21 PM.
    • ColdIron
    • By ColdIron 22nd Jul 17, 11:37 AM
    • 3,299 Posts
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    ColdIron
    With only 27% UK I wouldn't call Bankers a UK IT
    • Linton
    • By Linton 22nd Jul 17, 1:21 PM
    • 8,094 Posts
    • 7,916 Thanks
    Linton
    Depends on your circumstances, resources and objectives but there are many ways to skin a cat

    I use the 3 bucket or waterfall strategy split across several portfolios (SIPP, ISAs and unwrapped) in 3 layers. 1) Several years of cash 2) Income 3) Growth. I spend from 1 which is replenished monthly/quarterly etc by natural income from 2 which in turn is periodically supplemented by 3 when valuations or requirements suit me (every year or two or whatever). Resilient, low maintenance and copes well with my fluctuating incomings and outgoings

    .......
    Originally posted by ColdIron
    I do much the same with some of the cash replaced by wealth preservation funds/IT. Fortunately it has been possible to keep everything tax-protected.

    Splitting the total assets enables each pot to be totally focussed on its particular role. Thus the Growth portfolio is 100% equity with 50% mid range/small. The income portfolio is about 40% directly held dividend paying UK shares and the rest a global range of income generating bond and equity funds. If an investment's income falls below 3.5%-4.0% it is sold.
    • Audaxer
    • By Audaxer 22nd Jul 17, 1:52 PM
    • 318 Posts
    • 104 Thanks
    Audaxer
    I do much the same with some of the cash replaced by wealth preservation funds/IT. Fortunately it has been possible to keep everything tax-protected.

    Splitting the total assets enables each pot to be totally focussed on its particular role. Thus the Growth portfolio is 100% equity with 50% mid range/small. The income portfolio is about 40% directly held dividend paying UK shares and the rest a global range of income generating bond and equity funds. If an investment's income falls below 3.5%-4.0% it is sold.
    Originally posted by Linton
    I like the bucket approach and I have started an income portfolio in addition to my VLS funds. Although I am adding global funds I have selected it still seems to be too UK focused compared to the like of growth passive funds such as VLS and HSBC Global Strategy.

    Linton / ColdIron - would you say that an income fund that is up to 60% UK is not diverse enough? It just seems to me that to achieve a reasonable yield you need a good selection of UK income funds?
    • dunstonh
    • By dunstonh 22nd Jul 17, 1:57 PM
    • 88,833 Posts
    • 54,174 Thanks
    dunstonh
    Malthusian, I know what you mean, but are you saying there is no place for portfolios that just generate income? I think a lot of retirees and others that need income are happier to rely on ITs and funds that pay natural income than having to make capital withdrawls from a fluctuating growth portfolio.
    Originally posted by Audaxer
    Actually, fixed regular withdrawal is the most common method in the UK. More than natural income. Largely due to the historical position on the main pensioner investment product which was the investment bond. This allowed a 5% p.a. withdrawal with tax deferred. Most people took the 5% and in the vast majority of cases, they used either with profits funds or unit linked life funds on accumulation basis with withdrawals paid by cancellation of units.

    Today, the investment bond is a very niche option and the taxation of unwrapped and the larger ISA allowance means they are far more favourable to most. However, its legacy does live on. I did two income portfolios in the week where they are taking a fixed regular withdrawal from the cash account within the platform but are using the natural yield on income units to pay into the cash account. The current yield is somewhat more than the regular withdrawal. The reason for fixed regular withdrawal was certainty of payment each month and not having to rely on monthly distribution funds which may not have the best yield compared to quarterly or half yearly.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • Sue58
    • By Sue58 22nd Jul 17, 4:20 PM
    • 68 Posts
    • 11 Thanks
    Sue58
    With only 27% UK I wouldn't call Bankers a UK IT
    Originally posted by ColdIron
    Sorry, I wrongly worded my sentence, I meant to say Global IT's like Bankers, Caledonia, Brunner etc as opposed to solely UK IT's.
    • ColdIron
    • By ColdIron 22nd Jul 17, 4:30 PM
    • 3,299 Posts
    • 3,803 Thanks
    ColdIron
    would you say that an income fund that is up to 60% UK is not diverse enough? It just seems to me that to achieve a reasonable yield you need a good selection of UK income funds?
    Originally posted by Audaxer
    I'd say it depends. If you're looking for income the UK is hard to ignore. Across layer 2 I'm about 50% UK but this is a mixture of equity, fixed income, property and infrastructure so is a long way from 60% UK equity. For income 60% or 70% equities would be pushing my upper limit regardless of geography, markets have been very kind for some years now but this won't last forever. If I was in my twenties with a forty year investment horizon I'd be less concerned by volatility, particularly currency fluctuations, but I'm not and consistency counts for a lot, layer 1 notwithstanding. My layer 3 is mostly equity and a lot less UK
    • Linton
    • By Linton 22nd Jul 17, 4:43 PM
    • 8,094 Posts
    • 7,916 Thanks
    Linton
    ......
    Linton / ColdIron - would you say that an income fund that is up to 60% UK is not diverse enough? It just seems to me that to achieve a reasonable yield you need a good selection of UK income funds?
    Originally posted by Audaxer
    If the income is a significant part of your retirement plan I believe you need to diversify it geographically, by asset type, and by industry sector as much as possible without too much sacrifice of the % income. Whilst it was around 10% of my income requirment I was happy to have it mostly in UK equity. Now it's 20% and rising the risk is too high in my view. The UK's lack of diversity in industry sectors is a major issue - look at what happened to equity income funds which invested heavily in the high dividend paying banks prior to the 2008/2009 crash. Also BREXIT adds to the chances of UK specific problems.

    There is reasonable high income available in European and Far East equity. In areas where equity income levels are lower, in particular the US, corporate bonds can provide a useful return. For EM government bonds may be appropriate.
    • Audaxer
    • By Audaxer 22nd Jul 17, 7:00 PM
    • 318 Posts
    • 104 Thanks
    Audaxer
    Thanks guys. I was originally thinking that as I was investing quite a lot over a short time frame, it would be good to have a proportion of income generating funds or maybe ITs, so that if/when there was an equity crash I would have the relative comfort of still getting income coming in, and therefore I would be less concerned about the volatility of the income funds.

    However I'm now thinking that in an example where an equity income fund or IT dropped by say 40% in a crash and still paid a 4% annual dividend, the value of your fund would I assume be down by a total of 44% or more, the same as someone with a growth fund which dropped 40% and who made a 4% annual withdrawal from capital. So maybe with more diversified growth funds I would at least have the option of taking the equivalent of the annual dividend from the cash buffer, rather than selling units in a crash and reducing the value of my fund(s) by a further 4%. Does that make any sense?
    Last edited by Audaxer; 22-07-2017 at 7:02 PM.
    • ColdIron
    • By ColdIron 22nd Jul 17, 7:26 PM
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    ColdIron
    However I'm now thinking that in an example where an equity income fund or IT dropped by say 40% in a crash and still paid a 4% annual dividend
    Originally posted by Audaxer
    Are you confusing equities with bonds that pay a percentage interest? Consider City of London IT, it pays 4.30 pence per share today and has increased this every year for 50 years. The percentage will be whatever proportion this is of the share price on the day
    • Thrugelmir
    • By Thrugelmir 22nd Jul 17, 8:09 PM
    • 54,866 Posts
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    Thrugelmir
    I think a lot of retirees and others that need income are happier to rely on ITs and funds that pay natural income than having to make capital withdrawls from a fluctuating growth portfolio.
    Originally posted by Audaxer
    The problem that underlies this is that the companies invested in. Are suffering a fall in their own dividend cover along with an increasing number resorting to borrowing to fund dividends. As cash generation is insufficient. A situation that has been ongoing for over 5 years now in some instances. No shortage of profit warnings this year. Some companies that pay in US $ haven't actually increased their payouts this year. Any benefit is simply down to £ weakness.

    IT's may well hold reserves. Should a crunch bite though. Depleting the reserves will reduce NAV. A double edged sword.
    “ “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” Sir John Marks Templeton
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